Wisconsin's Response to Condemnation for Economic Development

The U.S. Supreme Court decision in Kelo v. City of New London prompted several states, including Wisconsin, to pass legislation regulating how and when private property may be condemned for economic development. Here’s a look at the probable impact of Wisconsin’s new legislation on the use of eminent domain for private development projects.

June 2005 U.S. Supreme Court decision provoked surprise and anger from property owners nationwide. In Kelo v. City of New London,1 the Court held 5-4 that the "takings clause" of the Fifth Amendment ("nor shall private property be taken for public use without just compensation") placed virtually no restrictions on the power of government agencies to acquire private property under eminent domain and then transfer the property to private entities engaged in economic development projects.

Wisconsin responded with legislation to prohibit government agencies from acquiring unblighted private property if the condemnor intends to convey or lease the acquired property to a private entity. The legislature also narrowed the definition of blighted property and placed that definition in the condemnation statute.

This article analyzes the Kelo decision and reviews the history of Wisconsin cases regarding the acquisition of blighted and unblighted property to accommodate private development projects. It also evaluates the probable impact of Wisconsin's new legislation on the use of eminent domain for private development projects.

The Kelo Facts

Involved in Kelo is a 90-acre tract of land in the Fort Trumbull area of New London, Conn., located at the junction of the Thames River and Long Island Sound. The area had experienced an extended period of economic decline.

When Pfizer Inc. announced that it would build a $300 million research facility adjacent to the Fort Trumbull area, the New London Development Corporation, a private nonprofit entity, sought to capitalize on Pfizer's presence by proposing an economic development project for the 90-acre tractimmediately adjacent to the planned Pfizer facility. Construction of a waterfront conference hotel was planned. Restaurants and shops, a marina for recreational and commercial use, a pedestrian riverwalk, and 80 new residential units organized into an urban neighborhood would be part of the development. Also involved was space for a new U.S. Coast Guard museum and a 90,000-square-foot site for offices and retail uses. Most of the needed land was assembled quickly, but owners of 15 properties objected. The objectors included homeowners who did not want to sell at any price, because their homes had been in their families for many years. The city of New London sought to acquire the balance of the properties needed by using its power of eminent domain. The objectors challenged the proposed taking in court.

The New London Superior Court granted a temporary injunction restraining acquisition of some of the property that was to be used for commercial purposes. The Connecticut Supreme Court held that all of the city's proposed takings were valid. Its ruling was based on Connecticut's Municipal Development Statute, which provided that the acquisition of land for economic development was a public use and in the public interest.2

In the U.S. Supreme Court, Justice John Paul Stevens wrote for the majority and was joined by Justices Souter, Ginsburg, and Breyer; Justice Kennedy wrote a concurring opinion. Justice O'Connor dissented and was joined by Justices Rehnquist, Scalia, and Thomas; Justice Thomas wrote a separate dissenting opinion.

In the majority opinion, Justice Stevens formulated the issue as follows:

"The disposition of this case therefore turns on the question whether the City's development plan serves a `public purpose.' Without exception, our cases have defined that concept broadly, reflecting our longstanding policy of deference to legislative judgments in this field."3

Justice Stevens continued by summarizing the Court's analysis:

"`Those who govern the City were not confronted with the need to remove blight in the Fort Trumbull area, but their determination that the area was sufficiently distressed to justify a program of economic rejuvenation is entitled to our deference. The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including - but by no means limited to - new jobs and increased tax revenue….' Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment."4

In forming this position, Justice Stevens and other members of the majority were influenced by two prior Court decisions, Berman v. Parker5 and Hawaii Housing Authority v. Midkiff.6 In Berman the Court dealt with a redevelopment project in Washington, D.C. that involved both blighted and unblighted property. The owner of an unblighted department store challenged the taking of its property. The Court ruled that because the overall blight elimination project served a public purpose, the city was entitled to acquire both blighted and unblighted property by eminent domain.

But the controlling decision, which the majority said bound it in Kelo, was Midkiff. In Midkiff the Court dealt with the Hawaii Legislature's enactment of legislation that permitted the Hawaii Housing Authority to condemn land that was leased to owners of single-family residences situated on the land. The purpose of the act was to break up the feudal land tenure system that had been developed by the early Polynesian immigrants to the Hawaiian islands. Initially, all land on the islands was controlled by the high chief, who assigned land for development to the islands' aristocracy. The system evolved over the years but by 1960, 72 percent of the land on the island of Oahu was still owned by only 22 landowners of individual tracts, each tract having 21,000 or more acres. The Hawaii Legislature found that this pattern of land ownership skewed real estate values and contravened public policy. The principal objection was that individuals could not own their own homes in fee simple but instead were compelled to lease the underlying land from the land barons. The land reform act permitted the Hawaii Housing Authority to condemn the underlying land and sell it to occupying lessees for its fair market value.

The Ninth Circuit Court of Appeals held that acquiring land for this purpose violated the "public use" provision of the Fifth Amendment. But the U.S. Supreme Court reversed. In a unanimous decision written by Justice O'Connor, the Court held that the elimination of a land oligopoly, traceable to Hawaiian monarchs, was an evil appropriate for elimination by legislation. She said:

"We cannot disapprove of Hawaii's exercise of this power. Judicial deference is required because, in our system of government, legislatures are better able to assess what public purposes should be advanced by an exercise of the taking power. State legislatures are as capable as Congress of making such determinations within their respective spheres of authority…. Thus, if a legislature, state or federal determines there are substantial reasons for an exercise of the taking power, courts must defer to its determinations that the taking will serve a `public use.'"7

Given this ruling, Justice Stevens and the majority in Kelo appeared to have no option but to approve the city of New London's plan. Justice O'Connor, however, was able to distance herself from the language she used in Midkiff. She said in her dissent in Kelo:

"Where is the line between `public' and `private' property use? We give considerable deference to legislatures' determinations about what governmental activities will advantage the public. But were the political branches the sole arbiters of the public-private distinction, the Public Use Clause would amount to little more than hortatory fluff. An external, judicial check on how the public use requirement is interpreted, however limited, is necessary if this constraint on government power is to retain any meaning."8

Justice Thomas was vehement in a separate dissent, contending that the clear meaning of public use in the Constitution should not be violated. He asked for a reversal of the Berman and Midkiff decisions.

"Public Use" and "Public Purpose" in Wisconsin

Section 13, article I, of the Wisconsin Constitution provides: "The property of no person shall be taken for public use without just compensation."

In 1951 the Wisconsin Supreme Court, in Schumm v. Milwaukee County, prohibited Milwaukee County from condemning land for constructing the War Memorial Center because the center was to be operated by a private corporation. The court said:

"The right to condemn is an attribute of sovereignty and is often indispensable for the common good but it is, nevertheless, so harsh a right that even the sovereign may not exercise it unless the public purpose is clear and the public use, for which the private owner is to be compelled to surrender his property, is assured. Where such assurance fails, the courts have consistently stood between the owner and the demand…."9

In 1954 the Wisconsin Supreme Court took a much broader view of public use. In David Jeffrey Co. v. City of Milwaukee,10 the court approved acquiring property under the Blighted Area Law, Wis. Stat. section 66.43. The court approved acquiring both blighted and unblighted buildings in the redevelopment district, following the U.S. Supreme Court's ruling in Berman.

In Sigma Tau Gamma Fraternity House v. Menomonie,11 the Wisconsin Supreme Court in 1980 refused to allow the city of Menomonie to acquire a fraternity house for the purpose of clearing land for a supermarket. The court held that the city was obliged to make specific findings that met the standards of Wis. Stat. section 66.431 (now Wis. Stat. section 66.1333). The court observed:

"Certainly a city does have the power to eliminate blight by acquiring land by condemnation, but in order to exercise that power it must proceed under the specific statute authorizing condemnation for that purpose. We conclude it did not do so in this instance…. This is not to say that property may not be taken under the Blighted Area Law unless it is itself blighted, but surely the blight to be eradicated must be more substantial and prevalent in the area than the city found here."12 (The city had found that 25 percent of the property within the district was blighted).

In Grunwald v. City of West Allis,13 the Wisconsin Court of Appeals in 1996 applied the rule of liberal construction to authorize the acquisition of a commercial building on Greenfield Avenue. The building was constructed in 1987 and included in the Veterans Park Redevelopment area in 1993. The Redevelopment Park contained 5.4 acres of land lying south of Greenfield Avenue and included 26 parcels of land. Respected appraisers retained by the parties differed on whether the project area was blighted. The circuit court rejected Grunwald's argument that the city failed to establish that the preponderance of buildings in the district were blighted. The court of appeals noted that the circuit court made findings that repairs to buildings in the district over the years had been superficial at best and that fire and structural hazards and defects had been intensified as the buildings continued to age and deteriorate. The court of appeals concluded:

"These findings are sufficient to satisfy a liberal interpretation of the act. Further, our review of the record convinces us that the trial court's findings were supported by the testimony of West Allis's witnesses and by exhibits admitted into evidence. The trial court's findings are not clearly erroneous; therefore, this court cannot set them aside. See § 805.17(2)."14

The court of appeals then addressed whether the Grunwald property needed to be included in the project. The city conceded that the Grunwald property, only seven years old at the time of its inclusion within the district, was not blighted. Grunwald's property was leased to a sandwich shop and H&R Block. The court of appeals concluded that the circuit court finding that the Grunwald property was necessary for the project was based on reasonable grounds and was not the result of fraud, bad faith, or gross abuse of discretion.15

Grunwald also argued that the public purpose doctrine was violated because, before condemnation, the city had given a developer a right of first refusal on the property. The court of appeals concluded that the short duration of public ownership by the city did not deprive the city of its right to characterize the acquisition as for a public use. This ruling leaves undecided the issue of whether it is permissible to have collaboration between a municipality and private developers on what should and should not be included in the redevelopment district, and what should and should not be condemned.

The decisions in Grunwald and Kelo support the conclusion that municipalities will have unfettered authority to acquire private property for redevelopment projects and their determinations of blight will not be subject to challenge unless they are clearly unreasonable or fraud, bad faith, or gross abuse of discretion is shown.

Decisions Regarding Public Use and Public Purpose Clauses in Michigan and Ohio

The leading state court decision on the application of public use clauses to economic development projects was Poletown Neighborhood Council v. City of Detroit.16 The Michigan Supreme Court in 1981 approved the proposal of the city of Detroit to purchase a 465-acre neighborhood for $200 million and sell it to General Motors for $8 million to permit construction of an automobile plant. The public use was creating jobs.

On July 30, 2004, before Kelo, the Michigan Supreme Court overruled its decision in Poletown. In County of Wayne v. Hathcock,17 the court dealt with the attempt of Wayne County to condemn land for the construction of a 1,300-acre business and technology park. This park was proposed to reinvigorate the struggling economy of southeastern Michigan by attracting businesses to the area, particularly those involved in developing new technologies. Although approved by Wayne County authorities, the Michigan Supreme Court boldly overruled its 1981 decision in Poletown and held that the condemnation of private property for the development park violated the public use provisions of the Michigan Constitution. The court said:

Hugh R. Braun, Michigan 1956, practices with Godfrey, Braun & Frazier LLP, Milwaukee. He argued the Sigma Tau (1980) and Grunwald (1996) cases on the use of eminent domain for economic development projects.

"However laudable these goals are, the facts remain that Wayne County intends to transfer these properties to private entities. These entities will be under no obligation to let the public in their doors or even on their lands…. This case is indeed a very straightforward example of government taking one's property for the sole benefit of another."18

The overruling of the Poletown decision was recognized by Justice Stevens in Kelo as an example of a circumstance in which a state court could take a very restrictive view of the public use clause of its constitution even though the U.S. Supreme Court had concluded that the public use clause in the U.S. Constitution placed no limitation on the power of states and municipalities to condemn for economic development purposes.

The Michigan Supreme Court decision reversing Poletown was followed by the Ohio Supreme Court in City of Norwood v. Horney.19Norwood was decided on July 26, 2006, one year after Kelo. In Norwood the court dealt with a proposal from a private developer, Rookwood Partners Ltd., to redevelop 99 buildings and 25 parcels of vacant land to provide for construction of 200 apartments, 500,000 square feet of office and retail space, and parking facilities for more than 2,000 vehicles.

Following the Michigan Supreme Court holding in Hathcock, the Ohio Supreme Court said:

"Our understanding of the individual's fundamental rights in property, as guaranteed by the Ohio Constitution and our consistent holdings throughout the last two centuries that a genuine public use must be present before the state invokes its right to take, is better reflected by Hathcock's holdings that economic development by itself is not a sufficient public use to satisfy a taking."20

These decisions in Michigan and Ohio establish that economic development projects do not satisfy the public use and public purpose provisions of these states' constitutions. Not only will the determination of municipalities regarding the necessity of using eminent domain for development projects in those jurisdictions not receive judicial deference, but using eminent domain for development purposes is prohibited.

Legislative Action in Wisconsin

In response to Kelo, 34 states have adopted some form of legislation restricting government agencies' acquisition of private property for transfer to developers.21 In Wisconsin, 2005 Act 233, which became effective on April 12, 2006, redefined blight and provided:

(b) Property that is not blighted property may not be acquired by condemnation by an entity authorized to condemn property under s. 32.02(1) or (11) if the condemnor intends to convey or lease the acquired property to a private entity.

(c) Before commencing the condemnation of property that a condemnor authorized to condemn property under s. 32.02(1) or (11) intends to convey or lease to a private entity, the condemnor shall make written findings and provide a copy of the findings to the owner of the property. The findings shall include all of the following:

The scope of the redevelopment project encompassing the owner's property.

A legal description of the redevelopment area that includes the owner's property.

The purpose of the condemnation.

A finding that the owner's property is blighted and the reasons for that finding.22

Unlike many states, including Connecticut, Wisconsin had never authorized the exercise of eminent domain to acquire unblighted private property for resale to developers unless the unblighted property was located in a development district that was predominantly blighted.23 Under the newly enacted provisions of Wis. Stat. section 32.03(6)(a) and (b), unblighted property cannot be acquired by eminent domain under any circumstances if it is later to be sold or leased to a private entity. The new statute would have prohibited West Allis from acquiring Grunwald's 7-year-old unblighted property to accommodate a redevelopment project on adjoining land that the city had determined was predominantly blighted.

Remaining for resolution is whether the new statute was intended to overrule the language in Wis. Stat. section 66.1333(17) providing that the Blight Elimination and Slum Clearance Act, including its definition of blight, shall be liberally construed. Will that rule of construction survive now that blight has been redefined in the condemnation statute? Condemnation statutes are to be strictly construed.24 Further, condemnation statutes are strictly construed against the condemnor and in favor of the condemnee.25 If the new statute is strictly construed against the condemnor and in favor of the condemnee, a substantial change in the law will have been achieved. No longer will the determination of blight by municipalities be virtually unassailable. The new statute requires that the municipality make "a finding that the owner's property is blighted and the reasons for that finding." Before the new statute was enacted, determination of blight by a municipality was subject to judicial review, but the standard of review was deferential and the determination could be set aside only if clearly erroneous or because of fraud, bad faith, or gross abuse of discretion.26 A property owner affected was not guaranteed an evidentiary due process hearing on whether his property was blighted or whether the properties included in the redevelopment district were predominantly blighted.

The word "blight" was first used in slum clearance statutes in the 1930s to define extreme conditions in which both residential and commercial structures were so defective that they threatened the health and safety of the occupants. The expanded definition of blighted area and blighted property in Wis. Stat. section 66.1333(2m)(b) and (bm) is so broad that there is virtually no limit on a municipality's power to declare blight. By placing the definition of blight in the condemnation statute and leaving a parallel but much broader definition of blight in the redevelopment statute,27 it appears that the legislature intended that the new definition of blight be strictly construed, if eminent domain powers were to be used. It remains unclear whether the new statute was intended to eliminate deferential review of municipal determinations of blight, which, at least in Grunwald, could be set aside only on the showing of fraud, bad faith, or gross abuse of discretion.

Public Policy

Under what circumstances should society permit municipalities to condemn private property for economic development projects? Many redevelopment projects in Wisconsin are claimed to involve critically important economic advantages for those areas in which they were implemented. Should society permit owners of land to block development projects by refusing to sell to developers under any circumstances? What about home owners such as those in New London who have sentimental attachment to homes that have been in their families for more than 100 years; should they be permitted to interfere with or obstruct the orderly acquisition of land for a 90-acre mixed use redevelopment project of great value to the city of New London, Connecticut? The proponents of the use of eminent domain point to the critical importance of assembling land for economic development and make a plausible argument that facilitating such economic development by the use of eminent domain is a public purpose.

In Wisconsin, the loss sustained by owners whose property is acquired for transfer to private developers can be substantially offset if assemblage premiums are paid. In Clarmar Realty Co. v. Redevelopment Authority,28 the Wisconsin Supreme Court in 1986 approved valuation of property subject to condemnation in terms of the property's enhanced value when combined with neighboring properties not owned by the condemnee. If Wisconsin courts permit evidence of assemblage value in acquisitions for economic development purposes, the injury to private property owners would be reduced. Many municipal officials argue that courts should prohibit "holdouts" from blocking needed projects, but require developers to pay a reasonable premium to owners who are forced to sell. The reasonable premium would be based on what developers have paid in similar circumstances to assemble land when eminent domain was not available.

But Justices O'Connor, Rehnquist, and Scalia, and particularly Justice Thomas, who favors overruling Midkiff and Berman, regard protection of private property as a bedrock principle of the U.S. Constitution that cannot be compromised. The New York Times reported on Aug. 25, 2005, that Justice Stevens spoke to the Clark County Bar Association in Las Vegas and expressed the view that the Kelo outcome was unwise and that the court ruled as it did because of the prior decisions of the court. He is reported to have said, "The free play of market forces is more likely to produce acceptable results in the long run than the best implemented plans of public officials."29 John Norquist, Milwaukee mayor from 1988 to 2003, submitted an amicus curiae brief in Kelo on behalf of the Congress for New Urbanism, urging the court to construe the takings clause of the Fifth Amendment to prohibit the use of eminent domain for development projects.30 Judge Richard Posner of the Seventh Circuit Court of Appeals takes a similar position in a private blog.31

The legitimate objection of private property owners whose property is being acquired for sale to a private developer is that fair market value, as applied in condemnation cases, almost never fully compensates the owner for the losses sustained. While current law permits deferral of tax on capital gain for a period of two years following Dec. 31 of the year in which the property is acquired,32 reinvestment by condemnees can be an expensive and exasperating task. An investor who did not occupy his or her property on the date it was condemned is not compensated for relocation benefits. In any event, relocation benefits are limited to $50,000 for owners and $30,000 for tenants.33

In Wisconsin and across the country, developers are coming to municipalities with elaborate programs of economic development and, in effect, borrowing the power of condemnation from municipalities. Often, it is not the municipality that determines what property is blighted and not the municipality that sets the boundaries of a redevelopment district. That determination is made by the developer who is bringing substantial investment to the community with promises of increased tax revenue and increased employment. Kelo's critics also are concerned about the likelihood of abuse as negotiations proceed between developers and municipal officials regarding use of eminent domain for development projects.

Conclusion

With U.S. Supreme Court justices sharply divided on the issue and with the supreme courts of Michigan and Ohio determining that acquisition of private property for economic development purposes is prohibited under a public use clause identical to the one in Wisconsin, what is the correct public policy? The Wisconsin Legislature has addressed these conflicting policy considerations. The policy incorporated in Wisconsin's new statute is very restrictive and prohibits the use of eminent domain to acquire unblighted property if sale or lease to a private entity is intended.

The issue yet to be decided is whether blight as defined in the new statute will receive strict construction and whether municipalities will have the burden of establishing that their determinations of blighted property and blighted area, when creating redevelopment districts, are sustained by a preponderance of the evidence. If such determinations will be set aside only when clearly erroneous or on a showing of fraud, bad faith, and gross abuse of discretion, the matter may warrant further legislative review.